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on Regulation |
| By: | Bernardo da Veiga (School of Economics and Finance,); Felix Chan (School of Economics and Finance,); Michael McAleer (Econometric Institute, Erasmus School) |
| Abstract: | The internal models amendment to the Basel Accord allows banks to use internal models to forecast Value-at-Risk (VaR) thresholds, which are used to calculate the required capital that banks must hold in reserve as a protection against negative changes in the value of their trading portfolios. As capital reserves lead to an opportunity cost to banks, it is likely that banks could be tempted to use models that underpredict risk, and hence lead to low capital charges. In order to avoid this problem the Basel Accord introduced a backtesting procedure, whereby banks using models that led to excessive violations are penalised through higher capital charges. This paper investigates the performance of five popular volatility models that can be used to forecast VaR thresholds under a variety of distributional assumptions. The results suggest that, within the current constraints and the penalty structure of the Basel Accord, the lowest capital charges arise when using models that lead to excessive violations, thereby suggesting the current penalty structure is not severe enough to control risk management. In addition, an alternative penalty structure is suggested to be more effective in aligning the interests of banks and regulators. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf186&r=reg |
| By: | Vinod Mishra; Russell Smyth |
| Abstract: | In this study we examine the extent to which firms pass back the cost of pollution regulation to workers in the form of lower wages using a unique matched employer-employee dataset for Shanghai. The benefits and costs of pollution regulation in China are important topics to study as China comes under increasing pressure to move from a single-minded focus on energy-driven economic growth to a more balanced approach to economic growth. The benefits of such a shift, particularly in terms of health, are relatively well-studied, but the costs are less so. The hip-pocket effect of pollution regulation on workers’ wages is particularly important given that it is likely to influence public support for a more balanced approach. Our main finding is that the reduction in average wages attributable to firms taking measures to control for pollution is between 13.8% and 18.8%, all things being equal. |
| Keywords: | Wages, Pollution abatement, China |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2010-21&r=reg |
| By: | Robert A. Ritz |
| Abstract: | Edgworth’s taxation paradox states that an excise tax can decrease the market price of a good. This paper presents a new version of the paradox in which a tax reduces price because it attracts entry of additional firms into the market. The paper also presents two new applications: (i) an emissions tax that leads to an increase in industry emissions (due to entry), and (ii) an interest rate cut by the central bank that reduces lending by commercial banks (due to exit). Basic principles of environmental regulation and monetary policy therefore fail under the conditions of the paradox. |
| Keywords: | Bank lending, Cost pass-through, Edgeworth's paradox, Environmental regulation, Market structure, Taxation |
| JEL: | D43 G21 H22 Q50 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:502&r=reg |
| By: | Claudio Lucarelli (Cornell University); Jeffrey T. Prince (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Kosali Simon (School of Public and Economic Affairs, Indiana University, and NBER) |
| Abstract: | Medicare’s prescription drug benefit (Part D) has been its largest expansion of benefits since 1965. Since the implementation of Part D, many regulatory proposals have been advanced in order to improve this government-created market. Among the most debated are proposals to limit the number of options, in response to concerns that there are “too many” plans. In this paper we study the welfare impact of two feasible approaches (of similar magnitude) toward limiting the number of Part D plans: reducing the maximum number of plans each firm can offer per region and removing plans that provide doughnut hole coverage. To this end, we propose and estimate a model of market equilibrium, which we later use to evaluate the impact of regulating down the number of Part D plans. Our counterfactuals provide an important assessment of the losses to consumers (and producers) resulting from government limitations on choice. These losses must be weighed against the widely discussed expected gains due to reduced search costs from limiting options. We find that the annual search costs should be at least two thirds of the average monthly premium in order to justify a regulation that allows only two plans per firm. However, this number would be substantially lower if the limitation in the number of plans is coupled with a decrease in product differentiation (e.g., by removing plans that cover the doughnut hole). For validation purposes, we also assess the impact of a recent major merger, and find that our model performs very well out of sample. |
| Keywords: | Medicare Part D, regulation, number of plans, product differentiation, discrete choice |
| JEL: | H42 H51 I11 I18 L13 L51 L88 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2010-14&r=reg |
| By: | Kazuo Ueda (Faculty of Economics, University of Tokyo) |
| Abstract: | In this short note, I will explain the structure of Japan's financial regulation and supervision and discuss by way of examples the structure's weaknesses and strengths. In doing so, I pay particular attention to the role played by the Bank of Japan (BOJ). The paper focuses mostly on the period since the late 1980s when Japan saw the formation of land and stock price bubbles, their burst and serious negative effects on the financial system and the economy. I argue that, despite a streamlined structure of financial regulation, monetary authorities' response was not quite optimal and discuss possible reasons for the sub-optimal behaviors. I also point out that there are significant synergies between monetary policy and prudence policy at central banks, but that such synergies are not fully exploited. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf200&r=reg |
| By: | Ojo, Marianne |
| Abstract: | The Basel Committee’s recent consultative document on the “Proposal to Ensure the Loss Absorbency of Regulatory Capital at the Point of Non Viability” sets out a proposal aimed at “enhancing the entry criteria of regulatory capital to ensure that all regulatory capital instruments issued by banks are capable of absorbing losses in the event that a bank is unable to support itself in the private market.” As well as demonstrating its support of the Basel Committee’s statement that a public sector injection of capital should not protect investors from absorbing the loss that they would have incurred (had the public sector not chosen to rescue the bank), this paper also highlights identified measures which have been put forward as means of rescuing failing banks – without taxpayer financing. Furthermore, it highlights why the controlled winding down procedure also constitutes a means whereby losses could still be absorbed in the event that a bank is unable to support itself in the private market. |
| Keywords: | capital; insolvency; financial crises; moral hazard; Basel III; Investor Compensation Schemes Directive; bail outs; equity; liquidity |
| JEL: | D53 K2 E58 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24823&r=reg |
| By: | Hahn, Robert W. |
| Abstract: | In response to the increasing impact of laws and regulations, several governments have introduced economic analysis as a way of improving regulatory decision making. This paper provides the first comprehensive assessment of governmentsupported economic analysis of laws and regulations. It also reviews the changing role of economic analysis in regulatory decision making. I find that there is growing interest in the use of economic tools, such as benefit–cost analysis; however, the quality of analysis in the U.S.A. and European Union frequently fails to meet widely accepted guidelines. Furthermore, the relationship between analysis and policy decisions is tenuous. To address this situation, I recommend alternative legal and institutional frameworks that could allow economics to play a more central role in regulatory decision making. In addition, I suggest that prediction markets could help improve regulatory policy. Published in the International Review of Environmental and Resource Economics: Vol. 3:No 4, 2010, pp. 245-298. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:611&r=reg |
| By: | Mark Setterfield (Department of Economics, Trinity College) |
| Abstract: | The purpose of this paper is to explore the similarities between Post Keynesian Economics (PKE) and Regulation Theory (RT). It is argued that, despite important differences between these traditions, the analytical contents of PKE and RT display broad similarities with respect to their treatments of the income-generating process, the crisis-prone nature of capitalism, and the institutional contingency of capitalist growth and development. This thesis is then exemplified and substantiated with reference to the 2007—2009 financial crisis and “Great Recession”. Specifically, it is shown that important strands of both PKE and RT characterize and were successful in anticipating the crisis as the result of the exhaustion of a financialized growth process. |
| Keywords: | Post Keynesian Economics, Regulation Theory, Great Recession, financial crisis |
| JEL: | B50 E11 E12 E21 E24 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:tri:wpaper:1007&r=reg |
| By: | Kverndokk, Snorre; Einar Rosendahl, Knut |
| Abstract: | Popular instruments to regulate consumption of oil in the transport sector include fuel taxes, biofuel requirements, and fuel efficiency. Their impacts on oil consumption and price vary. One important factor is the market setting. We show that if market power is present in the oil market, the directions of change in consumption and price may contrast those in a competitive market. As a result, the market setting impacts not only the effectiveness of the policy instruments to reduce oil consumption, but also terms of trade and carbon leakage. In particular, we show that under monopoly, reduced oil consumption due to increased fuel efficiency will unambiguously increase the price of oil. |
| Keywords: | transport regulations, oil market, monopoly, terms-of-trade effects, carbon leakage |
| JEL: | D42 Q54 R48 |
| Date: | 2010–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:rff:dpaper:dp-10-40&r=reg |
| By: | Sophie Bernard (Department of Economics, University of Ottawa, Ottawa, ON) |
| Abstract: | In a stylized model of international trade, a monopolist in the North exports second-hand products to a representative firm in the South to be reused as intermediate goods, with potential trade gains. The degree of reusability of waste products is a crucial choice variable in the North. This is because with a lack of international vigilance, non-reusable waste can be mixed illegally with the reusable waste. I explore the driving forces for the movement of illegal waste, paying particular attention to the role of local waste regulations, such as the EU's Waste Electrical and Electronic Equipment directive. Under mild conditions, it is shown that increased regulation stringency in the North leads its firm to reduce the degree of reusability of its products. As a result, the flow of non-reusable waste to the South increases, providing another channel for the Pollution Haven Hypothesis. |
| Keywords: | second-hand products, illegal waste, environmental regulation, trade |
| JEL: | F18 L10 O20 Q53 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ott:wpaper:1006e&r=reg |
| By: | Berger, Allen N.; Bouwman, Christa H. S.; Kick, Thomas; Schaeck, Klaus |
| Abstract: | Liquidity creation is one of banks' raisons d'être. But what happens to liquidity creation and risk taking when a bank is identified as distressed by regulatory bodies and subjected to regulatory interventions and/or receives capital injections? What are the long-run effects of such interventions? To address these questions, we exploit a unique dataset of German universal banks for the period 1999 - 2008. Our main findings are as follows. First, regulatory interventions and capital injections are followed by lower levels of liquidity creation. The probability of a decline in liquidity creation increases to up to around 50 percent when such actions are taken. Second, bank risk taking decreases in the aftermath of regulatory interventions and capital injections. Third, while banks' liquidity creation market shares decline over the five years following such disciplinary measures, they also reduce their risk exposure over this period to become safer banks. -- |
| Keywords: | Liquidity creation,bank distress,regulatory interventions,capital injections |
| JEL: | G21 G28 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:201005&r=reg |
| By: | Trinkaus, Gaby |
| Abstract: | Over the term of a securitization transaction, the concept of non-compliance allows a securitizing bank to classify a securitized loan as materially non-compliant with certain transaction requirements. Such a loan becomes unqualified for loss allocation. Therefore, non-compliant loans can directly affect transaction performance and the extent of risk transfer achieved with the transaction. The concept of non-compliance is incorporated in many securitizations independent of the underlying assets or structure. In Germany, there are currently no specific regulations regarding this concept. However, a bank can use discretion when classifying a loan as non-compliant and could thus report non-compliant loans strategically. This hypothesis is tested and confirmed based on a unique data set. -- |
| Keywords: | Non-compliance,risk transfer,securitization |
| JEL: | G21 G28 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:201006&r=reg |
| By: | Zsolt Darvas (Bruegel, Hungarian Academy of Sciences, Corvinus University of Budapest); Jakob von Weizsäcker (Thüringer Wirtschaftsministerium, Bruegel) |
| Abstract: | The case for taxing financial transactions merely to raise more revenues from the financial sector is not particularly strong. Better alternatives to tax the financial sector are likely to be available. However, a tax on financial transactions could be justified in order to limit socially undesirable transactions when more direct means of doing so are unavailable for political or practical reasons. Some financial transactions are indeed likely to do more harm than good, especially when they contribute to the systemic risk of the financial system. However, such a financial transaction tax should be very small, much smaller than the negative externalities in question, because it is a blunt instrument that also drives out socially useful transactions. There is a case for taxing over-the-counter derivative transactions at a somewhat higher rate than exchange-based derivative transactions. More targeted remedies to drive out socially undesirable transactions should be sought in parallel, which would allow, after their implementation, to reduce or even phase out financial transaction taxes. |
| Keywords: | transaction tax, Tobin tax, financial transactions, global financial crisis, financial regulation |
| JEL: | H20 D62 G10 F30 |
| Date: | 2010–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:mkg:wpaper:1001&r=reg |
| By: | Honohan, Patrick; Donovan, Donal; Gorecki, Paul; Mottiar, Rafique |
| Abstract: | This report to the Irish Minister for Finance by the Governor of the Central Bank describes the the performance of the respective functions of the Central Bank and Financial Regulator in the period 2003-8 in order to arrive at a fuller understanding of the root causes of the systemic failures that led to the need for extraordinary support from the State to the Irish banking system. |
| Keywords: | Ireland banking crisis; financial crises; financial stability policy |
| JEL: | E58 G28 |
| Date: | 2010–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24896&r=reg |
| By: | Zhe Li; Shouyong Shi |
| Abstract: | When a society wants to control aggregate emission under a certain target level, is it more desirable to impose a tax or a regulatory standard on emission? To answer this question, we explore a model where plants are heterogeneous in productivity and monopolistically competitive in the production of a set of varieties of (dirty-) goods whose by-product is emission. The main result is that the standard yields higher welfare than the tax if and only if productivity dispersion is small and the monopoly power in the dirty-goods sector is strong. In the process of obtaining this result, we find that, if the plants have no access to an abatement technology, then the tax dominates the standard unambiguously. When the plants do have access to an abatement technology, there can be less price distortion under the standard than under the tax, in which case the standard can yield higher welfare. These results illustrate that productivity dispersion is important for evaluating market-based environmental policies relative to non-market based policies. |
| Keywords: | emission tax; standard; productivity dispersion;abatement. |
| JEL: | E60 |
| Date: | 2010–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-409&r=reg |
| By: | Winston, Clifford |
| Abstract: | In Last Exit Clifford Winston reminds us that transportation services and infrastructure in the United States were originally introduced by private firms. The case for subsequent public ownership and management of the system was weak, in his view, and here he assesses the case for privatization and deregulation to greatly improve Americans’ satisfaction with their transportation systems. Chapters 1 and 5 are included here as a preview. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:618&r=reg |